Purchasing a home is one of the biggest financial commitments you will make. When it comes to obtaining a mortgage, there are various choices to make regarding terms, interest rates, and repayment options. If you plan on buying a new home or remortgaging your current home, it's necessary to have a clear understanding of the different types of mortgages available to you. Here we explore the differences between repayment and interest-only mortgages, as well as fixed and variable mortgages.
Repayment Mortgages:
A repayment mortgage is the most common type of loan. Here you pay back both the interest and part of the money you borrowed each month. If you make your payments on time, then by the end of the term all money borrowed will be paid back, and you will own your property completely. This is a good choice if you want to make sure you own your house at the end.
Interest-Only Mortgages:
An interest-only mortgage is when you only pay back the interest on your loan. This means you will have lower payments each month. However, at the end of the loan you still owe the original amount borrowed and therefore need to find another way to pay it back. You could do this by selling your house or using investments, your pension or savings. This could also work well if you are expecting your income to increase and therefore able to make future overpayments to your mortgage.
Repayment mortgages are generally available up to 95% of the property’s value whereas Interest Only mortgages are usually limited to 50%-60%.
Fixed-Rate Mortgages:
A fixed-rate mortgage has a set interest rate that stays the same over a certain period of time, usually two to ten years. This means that your monthly repayments remain the same, which makes budgeting easier. A fixed-rate mortgage is attractive if you want to know precisely how much you will be paying and have certainty about your outgoings.
That being said, it's also important to note that the fixed rate can be higher than variable rate options, particularly when interest rates fall. In addition there may be penalties for paying the loan back early.
Tracker Rate Mortgages:
A tracker mortgage is a type of variable rate mortgage. It usually follows the Bank of England's base rate. Your payments and interest could change each month if you have this kind of mortgage. A regular variable rate mortgage is different because the lender chooses the interest rate, but with a tracker mortgage, it follows what the Bank of England sets. Although some lenders will penalise you for early repayment, many lenders offer their trackers with zero early repayment charges which can be helpful if you are looking for greater flexibility with your mortgage.
Discounted Rate Mortgages:
This type of loan is where the lender offers you their variable rate but with a discount for a period of time, usually two to five years. Being variable it means that the amount you pay each month may change if the lender changes their rates. Unlike a Tracker Rate, which typically follows the Bank of England base rate, lenders can change their variable rate whenever they want. There may also be penalties for paying back the loan early.
Variable Rate Mortgages:
A variable rate mortgage is one where the interest rate can change at any point during the term of the loan, regardless of whether the Bank of England base rate changes. This means that the amount you pay each month can vary based on the interest rate. A variable rate mortgage can be risky, but it can also work in your favour if the interest rate decreases. However, it is generally advisable to seek a fixed, tracker or discounted rate mortgage as variable rates are usually set higher.
Offset Mortgages:
Offset mortgages are a good option if you have some savings and still owe money on your mortgage. For example, if you have £10,000 in savings and owe £100,000 on your mortgage, with an offset mortgage you would only pay interest on the difference (£90,000). This type of mortgage works well over time because it can help reduce the length of your loan.
Capped Rate Mortgages:
These are variable rate mortgages but then have a ceiling where the rate cannot go above a certain amount. This type of mortgage usually has a higher interest rate than other types of mortgages, so you will be paying more money for the security it provides. These kinds of mortgages are not very common nowadays.
Choosing the right mortgage can be overwhelming and stressful. Take your time to research different mortgage types and speak with a trusted mortgage broker who can help guide you through the process. We hope this post has helped you understand the main differences between repayment and interest-only, as well as fixed and variable mortgages. Remember that a mortgage is a long-term commitment, and the right type of mortgage for you largely depends on your personal circumstances and financial goals. Contact us now for further information or simply jump straight into our secure client portal to get things started now.
Published by Beechwood Mortgages Ref: 219335 with review and approval from Stonebridge Mortgage Solutions Limited who is authorised and regulated by the Financial Conduct Authority Ref: 454811.